Contrary to Left-Leaning Analysis, Tax Rates Do Correlate with a Healthy Economy

Comparing the economic health of states on a timeline can be a tricky thing. So many factors come into play, that it’s easy to overstate the effects that a particular quality has on the economy. Moreover, states should make economic decisions based on their own circumstances, and there’s no way to tell whether a poor state would be poorer or a rich state richer were taxation policies to reverse from low to high or high to low.

If a tweet from the National Education Association’s Pat Crowley floating around cyberspace is any indication, a study from the Institute on Taxation and Economic Policy showing that high-income-tax states actually have healthier economies than no-income-tax states will soon be entering RI’s debate about taxing the rich. As Center on Budget and Policy Priorities blogger Nicholas Johnson summarizes:

A key flaw in the Laffer analysis is that all of its measures of “economic growth” are really just measures of population growth. As a state’s population grows, you would expect its total number of jobs and its total economic output to grow with it. But, that’s not the same thing as a state’s per capita performance. That’s why, to see how a state’s economy is serving its people, you have to strip away the distorting effects of population growth.

That sounds like a plausible correction of free-market guru Arthur Laffer, but only until one thinks about it. Labor is a huge component of any economic calculation, so it hardly paints an accurate measure of a region’s economic health to remove population from it. Consider: By that argument, if the jobs of half of all Rhode Islanders disappeared and we all moved to New Hampshire to work the same jobs, ITEP and CBPP would apparently have us believe that both states’ economies are “serving their people” equally well. Sure, one state ensured that the other half of its employees didn’t lose their jobs, as well, while New Hampshire ensured that a half-a-million newcomers didn’t go without work.

By way of comparison, I collected the total labor force and employment numbers for the 18 states highlighted in the study (and threw in Rhode Island for local flavor) every January through the period that the study covers.

Clearly, all states benefited from the housing boom of the last decade, but the no-tax states were creating more jobs beforehand and continued to do so (or lose fewer) in the aftermath. It’s reasonable to consider, as the progressive researchers do, other comparative factors, but none of them change the fact that creating more jobs is no less important just because a state finds itself with more people to employ. When it comes to measures such as median household income growth, it isn’t surprising that a state whose workforce is growing rather than shrinking would show lower numbers.

That factor may be mitigated, anyway, by the lower cost of living… at least where taxes are concerned.